Using what Federal Bureau of Investigation agents describedas "unsophisticated tradecraft," such as hand signals andspecial telephone ring tones, some traders are conspiring to rigrates on large orders submitted by Fannie Mae andFreddie Mac, or front running them in the interestrate swaps market, the document says.

The FBI said in the bulletin that the information came froma former high-level employee at a U.S. bank and an employee at aCanadian Bank, plus interviews with other bank workers conductedin 2012 and 2013. The former high-level employee at the U.S.bank estimated the front running had resulted in profits of $50million to $100 million for the bank, the FBI said.

The bulletin did not name any of the traders or bankssuspected of the activity, or indicate whether it may extendbeyond the two banks.

Front running occurs when someone with advance knowledge ofanother market participant's plan to make a sizable transactionputs an order in first, often profiting from a market move thatcan occur once the big trade has gone through.

The FBI bulletin is the latest indication that officials areconcerned that traders are manipulating financial markets. U.S.and European authorities have fined 10 banks around $6 billionfor allegedly manipulating the London Interbank Offered Rate, orLIBOR, and other interest rate benchmarks, and authorities areactively investigating comparable behavior in the foreignexchange market.

PHONES PROGRAMMED

Current and former employees at the U.S. bank said that swaptraders at the bank programmed their phones with different ringtones to identify when certain customers were calling, alertingtraders that a large order was about to be placed, the FBI said.

According to the bulletin, one employee at the U.S. bank andthe Canadian bank employee reported that senior bankers at thetwo banks "planned and encouraged this behavior because it ledto higher revenue for their respective parent banks."

Disclosure of the suspected manipulation and front runningcame in an FBI intelligence bulletin that was distributed lastweek by the bureau's field office in Charlotte, North Carolina,to security officers at financial services firms.

The FBI said it had "medium confidence" in the information,which the bulletin described as coming from "multiplecorroborating sources with first-hand access." However, it saidit had "low confidence" that law enforcement could prosecutesuspected traders because the trades concerned seem to becompletely legitimate.

"It is standard policy for the FBI to share intelligenceinformation with our private sector partners to help protect oureconomy, thwart crime, and prevent threats impacting Americanbusinesses," Shelley Lynch, spokeswoman for the FBI inCharlotte, said in a statement. She would not elaborate.

Spokesmen for Fannie Mae and Freddie Mac did not immediatelyreturn calls for comment. Spokesmen for the U.S. Securities andExchange Commission and the Commodities and Futures TradingCommission declined to comment.

Fannie Mae and Freddie Mac, which are government-sponsoredenterprises (GSEs), often submit large swap orders to hedgetheir huge holdings of home mortgages against swings in the bondmarket. The size of the orders provide an incentive for frontrunning ahead of the trades.

The interest rate swap market is huge with a notional valueof about $400 trillion. In addition to GSEs, pension funds andinsurers use interest rate swap as a hedging tool, whilemunicipal governments sometimes enter into these contracts tolimit their interest rate risk on the debt they issued.

The FBI said its sources reported that voice brokers andsenior traders at both the U.S. and Canadian banks encouragedtraders to listen in on calls with the investors to gaintransaction information "which could be used to facilitate frontrunning or market manipulation."

They would then use hand signals to inform other traders ofthe details of the planned swaps, allowing these traders to alsobenefit, employees at the banks said, according to the bulletin.